Aug 20

The often forgotten risk of active funds management

On Wednesday of this week (18 August), the portfolio management team of 452 Capital announced to Colonial that they are calling it quits (at an undisclosed date) and will no longer be managing their Australian Equity Funds. So of course, the Research Houses downgrade their ratings to Sell, Redeem, Hold etc (we moved to Sell) and the flood of redemptions begins. Apparently Colonial are installing the high quality team at Integrity, but at the end of the day Integrity is not 452 whether it be better or worse so investors will no longer getting what they pay to get and the natural outcome of redemptions continue.

The irony in Integrity taking over is that the founder of Integrity, Paul Fiani, left UBS a few years ago and this resulted in billions leaving UBS resulting in a disastrous tax outcome for investors.

Anyway…I believe the outflow from 452 just one day after the announcement was equivalent to around 2 month’s of their usual redemptions. As this continues the poor investors who truly want to stay, whether they like it or not, will ultimately be lumped with a very large distribution and return of capital that will be subject to tax. Not a good result at all.

The thing with active fund managers is that when you invest with one you are taking a bet on the success of the key investment decision makers and when they leave so too does the performance (whether that performance be judged by style or other)…for the passively managed fund whereby investment decisions are not any where near as reliant upon key individuals, this risk does not really exist and these difficult situations, for investors and advisers, are avoided.

I’m sure many advisers will receive some negative outcomes from some of their clients and this is quite unfortunate. From what I can tell, 452 started in 2003 and in the 7 years to the end of July 2010 they produced performance of 9.50%pa…unfortunately for their investors it underperformed the ASX200 Accumulation Index which returned 9.94%pa. 452 Capital had outstanding pedigree (Founded by former Perpetual guru, Peter Morgan) and received very high ratings from most of the major Research Houses (Lonsec, van Eyk, etc)…unfortunately none of that has helped the long term 452 investor and its time to look for a new home for the funds that are heading their way.

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